A young reader (Dhruv) in his early 20s asked us a question. He has 25K to spare every month. He wants to know his options if he wants to invest this money (every month) for next 25 years. As we mentioned earlier also in our previous post, we are delighted to see that people ready to commit to long term wealth building for decades and not years. 🙂
So in this post, as we promised, we will try to address our young reader’s query.
But remember, there is no perfect way. People might take different roads to the same goal. So, go ahead and do let us know of your views in comments section.
Theoretically, putting aside 25K every month for next 25 years in a simple PPF account itself would create a corpus of 2.6+ Crore. And that is without even taking any risks. These are sure-shot returns. Unless the govt. and everything else comes crashing down.
But since you are young, it makes sense to take some risks. And with time horizon which you have, many (if not all) risks of so-called risky assets can be evened out.
We don’t know much about you, your family or your financial background. We only know two things. You are ready to invest 25K every month. You are ready to do this for next 25 years. Due to lack of important information, it is fundamentally not possible (and unethical) to suggest anything concrete here. Therefore, we will make certain assumptions and then give our thoughts.
Assumptions
- You are ready to invest 25K every month NOW.
- You don’t have any liabilities NOW.
- Your income (salary, etc) will increase every year for next 25 years.
- Your liabilities will increase in future (not uniformly though). i.e., you would need to fund your higher education, marriage, honeymoon, parent’s health, property purchases, etc.
- Hence we assume that though your income would increase, you will not be able to increase your contribution to investments. Your investment contribution would remain fixed at 25K per month.
- You and your family are adequately insured.
- You and your family have adequate health insurance.
- Though glamorous, we have chosen not to include individual stocks as an asset class for your wealth creation plan. It requires effort and passion. Since we don’t know much about you, it is best to avoid it. 🙂
What We Suggest
- Before even thinking of investing, keep aside 6 month’s expenses worth of money in some liquid asset classes. You can keep it in a savings account or an online fixed deposit. These days it’s easy to make (and break) online fixed deposits when required. So this should take care of your Emergency Fund.
- From the 25K, you should put in 10K (8.33K to be exact as there is a limit of 1 Lac on investing in PPF each year)* every month in a PPF account. This would turn into around 85 Lacs in 25 years. Now this is separate from your and your employer’s PF contribution. Remember, you cannot touch this money before 15 years (though you can withdraw some after 6 years, let’s not get into those details).
- For the remaining 15K, chose 4-5 good mutual funds. As one reader suggested in the previous post, it is better to stick with index funds when considering such long term horizons. That way, dependencies on fund managers and his team are reduced to almost nil. So you can go ahead with 3 index funds (4k, 3K, 3K = 10K). But it is also advisable to pick two well established actively managed funds (2.5K each). These funds should have been in existence for more than 10 years and should have proven the mettle in multiple market cycles. For names of such funds, check out our last post and its comment section. This 15K every month for next 25 years would create a corpus of around 2.2 Crore.
Problems which you might face in future
Now suppose that you want to buy a property after say 5 years. You would definitely be tempted to take money from this corpus which you would have created in last 5 years. Now though this approach looks sane and full of common sense, the problem would be that this would break the COMPOUNDING. Once compounding breaks and you continue to invest for next 20 years (after 5 years from now), your PPF contribution would have become 52 Lacs & MF would have become 1.2 Crore (Down from 2.2 Crore in previous case). So, you should plan your big expenses in such a manner that you long term compounding is not interrupted.
So how can one do this? Though it may not seem like a good idea at first, what you can do is to reduce this 25K contribution in PPFs & MFs to around 15-20K. Park the remaining money every month in some recurring deposits or income funds. This way, you would have started preparing yourself for future expenses and would not be required to interrupt compounding of your investments.
Hope that helps. Others are welcome to pour in their thoughts.
* – Thanks our reader Hemant Bhatia for bringing this to our notice.